Two rating agencies fear more Illinois budget gridlock ahead

CHICAGO – Illinois Gov. Bruce Rauner’s plan to trim fiscal 2019 spending at the expense of public schools and universities carries political risks at a time when the state can ill afford a return to budget gridlock.

That was the assessment of both Fitch Ratings and S&P Global Ratings in their initial reports on the election-year budget proposal the governor unveiled Wednesday.

“Considering that the strategy hinges on transferring to other stakeholders a significant portion of the funding burden related to large long-term liabilities, we believe it could encounter resistance, and thus entails political risk,” S&P wrote in its Thursday report. “At its current rating level, which reflects Illinois' weakened fiscal position, we believe the state has minimal capacity to withstand another protracted budget negotiation standoff."

Fitch also suggests that the legislative hurdles are steep given the shifts, challenging the state’s ability to achieve balanced operations.

“A re-emergence of political stalemate that negatively affects fiscal operations, including a material increase in accounts payable, could trigger a downgrade,” Fitch warned in a comment Friday.

S&P rates the state at the lowest investment grade level of BBB-minus with a stable outlook. Fitch Ratings has the rating at BBB with a negative outlook. Moody’s has it at the lowest investment grade level of Baa3 with a negative outlook.

Rauner's $38 billion general fund budget proposal relies on $1.3 billion of savings from various initiatives led by a shift in the “normal” cost of pension contributions to school districts and the universities. The state would phase in over four years the shift to districts, saving $262 million in 2019 -- with the exception of Chicago Public Schools, which would see the full shift of $228 million made in 2019. The first year of the shift to universities would save $101 million.

Another $470 million would be saved by removing group health insurance from collective bargaining and another $105 million saved by moving healthcare costs now covered by the state to universities. Another $129 million in savings comes from eliminating a healthcare subsidy for retired teachers and community college employees.

Resolution of a two-year impasse last July staved off a cut to junk. The budget passed only after a handful of GOP lawmakers broke with Rauner and joined the General Assembly’s Democratic majorities to adopt a budget package with a nearly $5 billion income tax hike .

S&P’s report, “Illinois Embarks On A Fiscal High-Wire Act In New Budget Proposal,” notes the tradeoff between saving state dollars at the expense of local governments.

“From a credit perspective, the cost shifting initiatives would provide recurring benefit to the state general funds because as proposed, they would be ongoing,” the report says.

But districts could be strained by the burden, would which cancels out the $350 million net fiscal gain they anticipated in fiscal 2019 under the new evidence-based funding formula adopted last year. That could complicate “any effort to lower property tax rates, in fulfillment of the governor's often-stated objective,” S&P said.

The state’s unpaid bill backlog also remains a credit concern because the proposed budget makes just a small dent in it from a projected fiscal 2018 year-end level of $7.7 billion to $7.3 billion in fiscal 2019, and that’s dependent on achieving a more than $300 million budget surplus in fiscal 2019.

Besides the projected savings, the budget relies on one-time revenues such as $600 million in inter-fund borrowing and at least one proposal that might not come to fruition – $240 million from the stalled sale of the downtown Chicago state headquarters.

“The state's large backlog of unpaid bills, distressed pension systems, and strained fiscal operations at a time of economic growth and declining Medicaid enrollments are cautionary harbingers of the potential for renewed downward pressure if economic conditions were to weaken,” S&P warned.

“Material progress in reducing accounts payable appears unlikely over the next several years, absent unexpectedly robust economic and revenue growth,” Fitch warned in its report.

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